T

he free trade agreement reached between the U.S. and South Korea on April 1 was seen as a boon by many U.S. industries, while a few organizations regarded it as an April Fool's prank.
   The Office of The United States Trade Representative (USTR) termed the deal the most commercially significant FTA in more than a decade. USTR says the deal,

"When we refuse to change to protect certain interest groups, and when we rest on the laurels that we enjoy now, and when we are only interested in keeping what we have, other countries will overtake us without our even knowing it. This is the stark reality of today's world." – South Korean President Roh Moo-hyun, in his address to the nation on the successful conclusion of KORUS FTA negotiations, April 2007

which must be approved by Congress, will boost several U.S. sectors including agriculture, industrial goods and consumer products and textiles.
   AeA, the largest U.S technology trade association, was among an array of manufacturing organizations cheering the agreement. AeA says U.S. high- tech exports to South Korea totaled nearly $11 billion in 2006, making it the sixth largest market for tech exports.
   "While South Korea is already an important market for U.S. high- tech companies, this FTA will boost high- tech exports by eliminating tariffs on most products, improving access for services, strengthening intellectual property protection and tackling non- tariff regulatory barriers," said William T. Archey, AeA's president and CEO.
   The National Association of Manufacturers applauded the fact that the deal would eliminate tariffs on 95 percent of consumer and industrial products between the countries within three years.
   At least one major U.S. manufacturing sector, the auto industry, is at odds with the agreement. Ford Motor Company issued the following statement, urging Congress not to approve the pact in its current form:
   "Ford Motor Company has supported every U.S. free trade agreement. As a company that operates and competes in 200 markets globally, we see the real and tangible benefits of free trade. Unfortunately this agreement, as we understand it, will not open the Korean market to free trade of automobiles. The Korean government misses its last, best chance to undo the protectionist policies that over the past two decades have kept the Korean auto market off limits to all manufacturers – U.S., Japanese and European."
   Another vocal opponent of the pact has been the U.S. rice industry, which says that U.S. rice farmers and marketers have been excluded from the deal.
   "This is a bad precedent for all future trade agreements," said Carl Brothers, senior vice president, Riceland Foods, and chairman of USA Rice's International Trade Policy Committee. Brothers said the exclusion of rice in the Korea agreement will likely encourage other potential free trade partners to expect similar treatment.

   Global trade agreements have had huge effects on the U.S. textile and apparel industries for decades. One of the industry's major organizations is backing the Border Tax Equity Act bill in hopes that it will eliminate inequities in previous trade agreements.
   "This bill is aimed at eliminating a $201- billion subsidy for foreign manufacturers who export to the U.S. and a $93- billion penalty tax on companies that export U.S. products abroad," said Karl Spilhaus, president of the National Textile Association (NTA).
   Spilhaus says the inequity results from the international trade rules put in place by the World Trade Organization (WTO). The WTO rules permit the 137 nations that employ an indirect tax, such as the VAT, to rebate those taxes on exports,

"Foreign direct investment is likely to increase. The increase will be driven by introducing investor protection mechanism, facilitating people exchanges and boosting Korea's external credibility. Investments will not only come from the U.S. but also from Japan and China. Since no tariff will be imposed on Korea's exports to the U.S., Japanese and Chinese businesses will find it an advantage in producing U.S.- bound exports in Korea." – analysis of KORUS FTA by Korean Ministry of Finance and Economy, April 2007

while also levying them on imports. The U.S. uses a direct tax system – taxes on income or on owning property. Under the WTO rules, no portion of these taxes may be rebated. And the U.S. does not impose on imports a fee equivalent to these direct taxes.
   The result, according to NTA, is that a U.S. company pays corporate income tax and property tax in the U.S. If it exports its product to France, for example, it will pay a 19.6- percent French VAT in addition to any import duties. In other words, the U.S. company will pay the full amount of both the U.S. and the French taxes. On the other hand, when a company in France sends its products to the U.S., they are not subject to any U.S. taxes, in addition to relatively low import duties in the U.S., typically not above 10 percent. Additionally, the government of France will rebate to the exporter the French VAT. Net result: the French company pays neither U.S. nor French tax.
   Every country the U.S. does significant trading with has the VAT. The amount of VAT refund is $201 billion a year. The VAT imposed on U.S. exports to those countries is $93 billion a year.
   The NTA says that due to the VAT disadvantage, American companies have realized little benefit from foreign market openings promised in many rounds of trade talks. The Border Tax Equity Act requires that upon completion of WTO negotiations by a set date, the USTR must certify to Congress that the goals of equitable border tax treatment for goods and services have been met.    The USTR, in its annual report delivered to Congress on March 30, cited several 2006 trade developments it considers to be successes in reducing or eliminating significant barriers to U.S. trade and investment. These include:

   • Bilateral agreements signed in connection with World Trade Organization (WTO) accession negotiations with Russia and Ukraine that provide access for U.S. exporters of products ranging from frozen pork to leased aircraft.

   • At the April 2006 Joint Commission on Commerce and Trade, the government of China agreed to increase intellectual property rights (IPR) protection for software by requiring the pre- loading of operating system software on all computers produced or imported into China, as well as requiring government agencies to purchase computers with pre- loaded software.

   • Japan introduced a new leniency system to encourage companies to report illegal cartels and construction bid rigging schemes that effectively impede market access for U.S. companies.

   • The European Union agreed on a package of bilateral market- opening actions for U.S. exports of fish, chemicals, agricultural products and other items, designed to offset tariff increases that U.S. products faced when 10 new countries joined the European Union in March 2006. A similar agreement was reached with the European Union regarding services.

   • Conclusion of bilateral WTO market access agreements with Vietnam, Ukraine and Russia, which will result in substantial new market access for goods and services when these countries join the WTO. Vietnam became a WTO member in January 2007, and work continues with Ukraine and Russia.

   • The U.S. and Panama concluded free trade negotiations last December. The comprehensive agreement would make duty- free nearly 90 percent of U.S. exports of consumer and industrial products to Panama. All tariffs would be eliminated in 10 years. Panama is a growing market for U.S. products, with U.S. exports totaling $2.2 billion in 2005. The Panama FTA must be approved by Congress. President George W. Bush announced in March his intent to sign the pact.